Division A offers its product to outside markets for ($60.) It incurs variable costs of ($22) per

Question:

Division A offers its product to outside markets for $$60.$ It incurs variable costs of $$22$ per unit and fixed costs of $$75,000$ per month based on monthly production of 4,000 units. Division B can acquire the product from an alternate supplier for $$63$ per unit or from Division A for $$60$ plus

$$4$ per unit in transportation costs in addition to the transfer price charged by Division A.

Required

a. What are the costs and benefits of the alternatives available to Division A and Division B with respect to the transfer of Division A’s product? Assume that Division A can market all that it can produce.

b. How would your answer change if Division A had idle capacity sufficient to cover all of Division B’s needs?

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